In the past, users were limited to a particular type of market, often selected by a third party, that pre-defined who was permitted to participate, the role of the participant, what types of orders were permitted, how payment was received, the terms of the settlement, and a myriad of additional features of the financial transaction. In many cases, this predefined market was a designated contract market (DCM), the “designation” indicating that it was certified and regulated by the Commodity Futures Trading Commission (CFTC). DCMs operate with a central limit order book (CLOB) for each contract type. A CLOB is a transparent, contemporaneous, and anonymous database of all orders associated with one or more contracts to trade financial instruments. It is transparent because all qualifying users can see all of the trading activity. It is contemporaneous because it updates in close to real time. It is anonymous because the identity of parties to trades are not revealed.
Being a designated contract market (DCM) has many advantages, including margin requirements and clearing. This is particularly advantageous in the regulatory environment anticipated in light of the changes by the CFTC and the Securities and Exchange Commission (SEC) because of the Dodd Frank Act.
However, for many instruments, such as non-deliverable forwards (NDFs), liquidity exists in over-the-counter (OTC) markets, which are not represented by a CLOB. Typical customer demand also covers all business dates rather than merely a few highlighted per year, as in typical systems. OTC markets also raise the problem of how to direct the attention of market participants with thousands of ongoing contracts in the graphical user interface (GUI).